The above answers are correct in that it reduced lice, and was to dehumanise prisioners. however they are quite wrong about the use of the hair, womens hair was for u-boat socks and railway boots - mens to make felt to insulate tanks and aircraft.
August 6. 1942
Amtsgruppe D - Concentration Camps
D II 288 Ma./Ha. Tgb. 112 geh.
Re: Use of hair cuttings
To the Commandants of the Concentration Camps Arb., Au., Bu., Da., Flo., Gr.Ro., Lu., Maut/Gu., Na., Nie., Neu., Rav., Sahs., Stutth., Mor., SS SL Hinzert.
SS Obergruppen fuhrer Pohl, Chief of the SS Wirtschafts-Verwaltungshauptamt has ordered that the hair of concentration camp prisoners is to be put to use. Hair is to be made into industrial felt or spun into yarn. Woman's hair is to be used in the manufacture of hair-yarn socks for 'U'-boat crews and hair-felt foot-wear for the Reichs-railway.
It is therefore ordered that the hair of female prisoners be disinfected and stored. Men's hair can only be put to use if it is longer than 20 mm. SS Obergruppen fuhrer Pohl therefore agrees for an intial trial period to the growing of the prisoners hair to a length of 20 mm before it is cut. Long hair could facillitate escape and to avoid this the camp commandants may have a middle parting shaved in the prisoners' hair as a distinguishing mark, if they think it is necessary.
It is planned to planned to set up a hair processing workshop in one of the concentration camps. Further details as to the delivery of the accumulated hair will follow.
The total monthly amount of male and female hair is to be reported to this office on the 5th of every month beginning from September 5, 1942.
Generalmajor der Waffen-SS
Directive to commandants of concentration camps dated January 1, 1943:
"The prisoner's hair is to be sent to Alex Zink, Fur Manufactures, Ltd., Nuremberg. The company will pay 0.50 marks for every kilogram of hair."
(Bubdesarchiv Koblenz; document NS 3 386)
Translation of a report from IMT, Band XX, Nurnberg 1947, taken from Concentration Camp Dachau 1933-1945, ISBN 3-87490-528-4, p. 137; Plate 282 with translation.